MESSAGE
| DATE | 2004-01-04 |
| FROM | From: "Ray C."
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| SUBJECT | Subject: [hangout] Software Services Opportunities
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Large Software Customers Refuse to Get With the Program
Some Corporate Buyers Start To Resist Forced Upgrades,
Higher Maintenance Fees
By KEVIN J. DELANEY and DAVID BANK
Staff Reporters of THE WALL STREET JOURNAL
Fluor Corp. has joined a growing revolt against the software industry.
The engineering and construction giant had so many problems installing
software from one of its biggest suppliers, SAP AG of Germany, that Fluor
ditched parts of the products it had licensed, replaced its own chief
information officer and took a $13 million charge. Then SAP said it would
soon stop providing standard technical support for the software -- meaning
Fluor, based in Aliso Viejo, Calif., would have to install a new version or
pay even higher annual fees to get updates, fixes for bugs and access to
SAP's technicians.
Fluor's response: In late 2002 its new CIO, Ray Barnard, suspended monthly
maintenance payments to SAP, which already totaled hundreds of thousands of
dollars a year. Then, last February, over a sandwich lunch in San Diego, Mr.
Barnard told SAP CEO Henning Kagermann that the German company had to
overhaul how it charged for software.
After a long slump in corporate technology spending, software buyers have more
power than ever before -- and they're using it to force software makers to
change the way they do business. Some customers are refusing to upgrade and
are demanding their suppliers continue to support old software. Others are
dumping their suppliers and shopping for more-accommodating vendors. Still
others are training their own employees to handle tech support.
After months of negotiations with Fluor, SAP, which was receiving a chorus of
complaints from other big customers about the upgrade, blinked. It cut a deal
on upgrades and other issues with Fluor, which agreed to resume payments.
Shortly after, SAP announced an offer for all its customers: Those who don't
upgrade can receive a lower-level maintenance option for no extra charge.
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An SAP spokeswoman concedes Fluor had "issues" with SAP's software, but says
Fluor's problems were partly linked to its own management changes and to the
external company Fluor hired to help install the SAP system. She says many
customers have been happy to upgrade, and SAP doesn't abandon those who
decide to wait. She also says the new lower-level maintenance offer was
technically available earlier, though few SAP salespeople or customers had
been told about it.
SAP, the leader in the $40 billion market for application software to manage
financial data, manufacturing, customer relations and other activities, is
only the latest vendor to wave a white flag. In 2002, a customer revolt
forced Microsoft Corp. to overhaul its plans for sweeping changes in how it
charges for upgrades. PeopleSoft Inc. this spring extended support for an old
version of its software by an additional nine months; the company also
extended support for software from newly acquired J.D. Edwards & Co. to as
long as six years, from four.
The widespread retreat signals that software companies may no longer be able
to count on boosting the revenue streams that helped them through the
technology downturn. With markets saturated, software companies have tried to
dig deeper into the wallets of existing customers, using a variation on the
"planned obsolescence" U.S. car makers invented in Detroit's tail-fin era.
Car makers designed vehicles that wore out quickly, to ensure replacement
purchases.
Since software doesn't wear out, software makers set timetables for phasing
out programs. Just when big clients work out the kinks in complex software
systems, the software companies tell them they need to install new versions.
This gives software companies a chance to impose fresh licensing fees and a
big chance to sell existing customers on new features, usually unavailable
for older versions.
Sometimes software companies provide upgrades free, generating additional
revenue by selling users on new add-ons or increasing maintenance fees. These
fees have crept up to as much as 22% or even 25% of the original license fee,
from about 15% a few years ago. For example, a company that paid Oracle Corp.
its standard licensing fee of $3,995 per user for its "e-business" suite of
business-software applications would also pay an annual fee of $599 for
software updates and $280 for product support, or 22% of the license fee.
Some software companies now get the majority of their profits from such
recurring revenue, with original license fees serving as an introductory loss
leader. For SAP, more than four out of every five euros in license revenue
come from a veteran client.
Technical support also becomes a powerful stick for software makers to wield
against customers. If buyers don't want to upgrade, software makers can raise
the fees for supporting the old product, or yank support for it altogether.
The latter move also saves software companies a bundle, by shifting support
personnel from old products to current ones.
"We all do it," says Oracle CEO Larry Ellison. "If we have too many old
versions, that moves engineers from working on a new product to working on a
seven-year-old product."
When times were good and technology was advancing rapidly, customers accepted
the forced upgrades as a fact of corporate life. Now customers aren't
swallowing it. "Most of us don't buy it anymore," says Fluor's Mr. Barnard,
who plans to wait until at least 2005 to upgrade the company's SAP system.
Some software customers have left their suppliers and defected to rivals. In
2000, French fax-and-messaging software company Esker SA installed a
customer-management system from Siebel Systems for use by 165 employees.
Siebel dropped regular support, which includes updates and technical help,
for the version Esker was using in June -- but offered to extend that support
for about $94,000 a year, or 50% more than the original price. The upgrade
itself would have been free, but Jean-Michel Berard, Esker chief executive,
estimated that additional hardware, consultants and training would have cost
another $175,000, not including Esker's own staff time.
"In the '90s or 2000, it was a practice that was accepted, because companies
were rich, or thought they were," Mr. Berard says. "That's no longer the
case."
Esker dropped Siebel and switched to Salesforce.com, a Siebel competitor that
runs software systems on its own computers, freeing customers from upgrade
worries. Clients use the Internet to connect to Salesforce.com's computers.
A Siebel spokesman says Esker is trying to make Siebel look bad because Siebel
rebuffed its 2000 request to partner up in selling its fax software, a charge
Mr. Berard denies.
The threat of dropped support also spurred the Los Angeles County Museum of
Art to switch software suppliers. For four years, the museum had used a
PeopleSoft offering to prepare its general ledger, accounts payable, accounts
receivable and other reports. In 2002, PeopleSoft gave the museum a year's
notice that it was ending support at the current price for version 7 of the
software and encouraged an upgrade to version 8.
"It's not prudent to run software without support," says Ann Rowland, the
museum's chief financial officer, who oversees information technology as part
of managing the museum's $40 million operating budget. Ms. Rowland held
discussions with PeopleSoft, seeking a cut in the price increase for product
support, but "we didn't see any concessions," she says. In July, the museum
switched from PeopleSoft's financial-accounting software to archrival
Oracle's. A few months later -- too late for the museum -- PeopleSoft
extended its support offer.
PeopleSoft said in a statement that its support policy is the "longest and
most comprehensive" in the industry, but it limits support for older versions
because most customers "prefer to see PeopleSoft invest in research and
development for future releases."
Some customers are happy to upgrade. The recent versions of most business
applications, for example, allow better Web access to company data than
previously possible. Dow Corning Corp. plans to finish upgrading in 2005 an
SAP software system it installed for $100 million in 1999 and which is used
by more than 8,000 staffers. CIO Abbe Mulders says the upgrade, which should
take six months and cost several million dollars, will be worth it for the
Midland, Mich., maker of silicon-based products, partly by making it easier
to serve customers over the Web.
But even Dow Corning, which SAP cited as an example of its good relations with
users, says the German company has to soften its demands. Ms. Mulders says
Dow Corning wouldn't be able to upgrade by SAP's deadline at the end of
December 2003 -- and is still negotiating the extra maintenance fees that SAP
wants to impose to provide full support in the interim.
Geoff Penney, chief information officer for Charles Schwab Corp., says he's
happy to install upgrades from Siebel and others, as long as the pain of an
upgrade is outweighed by the value of the innovation. "It only becomes an
issue when that stops, or when they're producing stuff we don't want," he
says.
That's the problem. Many companies say the systems they installed in the 1990s
are still up to the task and they can't make a business case for the hassles
of installing a new version or adding on the latest bells and whistles. A
J.P. Morgan survey of SAP users published last year found that only 28% of
the companies polled believed SAP's latest version "delivered value" over
what they already are using. An additional 19% said it "partly delivered
value."
Just weeks before SAP toned down its upgrade campaign, SAP executives insisted
few customers had complained about the plan to boost fees. Mr. Kagermann, the
chief executive, said increasing maintenance fees to 19% of the original
license cost, from 17%, for those who don't upgrade was reasonable. "We
cannot maintain mainstream maintenance" for older software that fewer and
fewer clients use, Mr. Kagermann said at a conference in Paris in late
September.
But in Sept. 26 e-mail to staff outlining SAP's softened policy, Mr. Kagermann
acknowledged that customers had pushed back. He stressed the importance of
"safeguarding" maintenance revenue, which represents one-third of SAP's sales
and "has become increasingly important."
Customers are pushing back against other software vendors as well. A survey by
Goldman Sachs in August found that more than half of respondents had
renegotiated their maintenance contracts for 2003. Nearly one in five cut
their bills more than 15%.
Some companies are shifting to Linux and other open-source software, in which
bug fixes and upgrades can be downloaded free. Linux customers aren't immune
from pressure, though: Red Hat Inc. will stop providing updates for its
original version of Linux in April 2004, partly to spur upgrades to a new
edition that includes updates and product support -- and costs more.
Other customers try supporting the software on their own. That's what
Electronics for Imaging Inc. of Foster City, Calif., did in 2002 after
support expired on its PeopleSoft human-resources software. The 1,000-person
digital-printing company pocketed the $300,000 to $400,000 it would have
spent on an upgrade and had its own tech staff field any problems with the
software. It is considering switching to SAP's HR software, but says the
expense involved means any such move could take some time.
Some software companies are responding to the revolt by trying to make their
applications faster and cheaper. Siebel has launched an "on demand" service,
similar to Salesforce.com's, in which customers tap into applications run by
Siebel at centralized data centers and pay a monthly fee for just the
software they use, rather than spend millions of dollars on risky
installations.
Fluor's Mr. Barnard and some fellow clients are pushing SAP to let them pay
monthly service fees for only the software they need. But he doesn't expect
bruising battles this year over upgrade deadlines. "I hope not," says Mr.
Barnard. "Based on the way SAP has begun responding this year, I think we can
work through that."
Write to Kevin J. Delaney at kevin.delaney-at-wsj.com1 and David Bank at
david.bank-at-wsj.com2
--
At times the discrepancy between institutions and technology becomes an
incompatibility, and then one or the other must give way.
-Allen Wheelis
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